If you’re interested in this topic, you probably already know what are crypto futures. As you can see, there isn’t just one type of futures contract. Today, let’s join FMCPAY to explore Perpetual Futures vs Quarterly Futures – two of the most popular futures contracts in the crypto trading community.
1. Introduction to Futures Trading
Before diving into key features of perpetual futures vs quarterly futures, let’s take a quick grasp on futures trading for those who are new or not familiar with this kind of trading.
Futures trading is a form of derivative trading, where the value is derived from an underlying asset like cryptocurrency. Unlike the spot market, buying a futures contract involves acquiring the right and obligation to purchase the asset at a future date and a predetermined price.
Futures contracts were initially developed for commodities to hedge against future risks by fixing prices in advance, with settlement occurring on a specified date. Over time, this method expanded to other assets, eventually entering the crypto market in 2017 when the Chicago-based CME and Cboe exchanges introduced the first Bitcoin futures.
Although futures contracts were initially intended for hedging (to minimize potential losses from unfavorable market changes), they are also used for speculative purposes with leverage. Leverage allows traders to control a large contract value with a smaller equity stake, meaning you don’t need to pay the full contract value upfront. With leverage, you can manage contracts up to 125 times the value of your portfolio, which can significantly amplify both potential profits and losses.
Now that we’ve covered the basics, we’ll move on to the details, benefits, and drawbacks of perpetual futures vs quarterly futures, examining how these contracts operate and the factors traders should consider.
2. What is Perpetual Futures?
Perpetual futures contracts differ from traditional futures in that they have no expiration date, so traders aren’t bound to a specific settlement date. This flexibility means traders can hold positions indefinitely, making it easier to manage compared to quarterly futures. This is a significant advantage when comparing perpetual futures vs quarterly futures.
To open a leveraged position in perpetual futures, you need to provide an initial margin, which is a fraction of the total position value. For example, if you want to buy 10 ETH with an initial margin of 1 ETH, your leverage is 10x, meaning your margin is 10% of the total order value. This initial margin serves as collateral to back your position.
After opening the position, it’s crucial to monitor the maintenance margin—the minimum collateral required to keep your position open. If this margin nears the minimum level, you’ll receive a margin call, prompting you to add more funds. Failing to do so may result in your position being liquidated, with your collateral lost. To minimize risks in perpetual futures vs quarterly futures trading, using stop-loss orders is recommended.
There is a feature that prevents the price of perpetual futures from diverging too far from the asset’s spot price. This is managed through the funding rate, where payments between long and short position holders occur every 8 hours. When the funding rate is positive (meaning the perpetual contract’s price exceeds the spot price), long position holders pay short position holders, and vice versa. This system incentivizes traders to keep the contract price aligned with the spot price, ensuring it remains close.
3. Pros & Cons of Perpetual Futures
Perpetual futures offer flexibility as they don’t have an expiry date, making them a popular choice for many traders. However, like any trading instrument, they come with both advantages and drawbacks. Below, we’ll explore the pros and cons of perpetual futures, providing a deeper understanding of this trading strategy within the context of perpetual futures vs quarterly futures compare.
| PROS | CONS |
| No Expiry Date: Unlike quarterly futures, perpetual contracts allow traders to hold positions indefinitely, providing more flexibility. | Funding Rates: Traders may incur costs due to funding rates, which are fees paid periodically based on the difference between the perpetual contract price and the spot price. |
| Frequent Settlement: Perpetual futures settle multiple times a day, ensuring that traders can regularly adjust their positions. | Price Volatility: The high leverage available in perpetual futures can lead to significant price swings, increasing the risk of liquidation. |
| Leverage: Offers higher leverage options, enabling traders to maximize potential profits with a smaller initial investment. | Complexity: Managing perpetual futures requires close monitoring of funding rates and price movements, making them more complex than quarterly futures. |
| Market Liquidity: Due to their popularity, perpetual futures often have higher liquidity, making it easier to enter and exit positions. | Leverage Risk: The temptation to over-leverage can lead to substantial losses, especially in volatile markets. |
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4. What is Quarterly Futures?
Quarterly futures contracts allow traders to buy or sell an underlying asset at a predetermined price before a specific expiration date, much like traditional futures contracts. These contracts have a fixed expiry date, typically set for the last Friday of every quarter, making them predictable and straightforward to manage. For example, a BTC-24JUN22 contract would expire on June 24, 2022, as it falls on the last Friday of the second quarter.
One of the key aspects of quarterly futures is that traders are not required to hold the contract until the expiry date. They can close their positions beforehand, with their profit and loss (P&L) calculated as the difference between the opening and closing prices. For instance, if you purchased a BTC-24JUN22 contract at $39,000 and decided to close it before the expiration, your P&L would reflect the price difference at which you closed the contract.
As the expiration date approaches, the price of the quarterly futures contract tends to converge with the spot price of the underlying asset due to market forces such as arbitrage and supply-demand dynamics. This behavior is essential to understanding when comparing perpetual futures vs quarterly futures.
In practice, let’s say you bought a Bitcoin futures contract expiring on March 31, 2022, at $17,200. If, by the expiry date, the price of Bitcoin has risen to $25,000, you can settle the contract at the original $17,200, allowing you to sell at the market price and realize a profit of $7,800. This potential for profit is a significant difference when comparing perpetual futures vs quarterly futures, although it also comes with the risk that the market may move unfavorably before the expiration date.
The presence of an expiry date in quarterly contracts adds a layer of strategy that differs from the continuous nature of perpetual futures. Understanding these dynamics is crucial for traders aiming to maximize their investment strategies using perpetual futures vs quarterly futures in the crypto trading.
5. Pros & Cons of Quarterly Futures
On the other hand, quarterly futures are traditional futures contracts with a fixed expiry date. This structure offers different advantages and challenges for traders. Here, we’ll delve into the benefits and limitations of quarterly futures, particularly when comparing perpetual futures vs quarterly futures.
|
PROS |
CONS |
| Predictability: With a set expiry date, quarterly futures allow traders to plan their strategies more effectively. | Limited Flexibility: The fixed expiry date can be a limitation for traders who prefer the continuous nature of perpetual futures. |
| Price Convergence: As the expiry date approaches, the contract price converges with the spot price, which can reduce unexpected price movements. | Expiry-related Volatility: Approaching expiry dates can lead to increased market volatility, as traders rush to close or roll over their positions. |
| No Funding Rates: Unlike perpetual futures, quarterly futures do not have funding rate fees, making them potentially more cost-effective over time. | Forced Settlement: If the market moves unfavorably, traders might be forced to settle at a loss when the contract expires. |
| Strategy Alignment: Quarterly futures can be well-suited for traders with long-term market views, providing a structured timeline for their strategies. | Lower Liquidity: Compared to perpetual futures, quarterly futures may have lower liquidity, making it harder to execute large trades quickly. |
6. Perpetual Futures vs Quarterly Futures Comparison
When comparing perpetual futures vs quarterly futures, it’s essential to understand their core features and how these differences can impact your trading strategy. Both types of contracts offer unique benefits that traders need to consider.
| Criteria | PERPETUAL FUTURES |
QUARTERLY FUTURES |
|
Expiry Date |
No expiration date, can hold positions indefinitely. | Fixed expiration date, typically at the end of each quarter. |
|
Trading Market |
Primarily used in the derivatives market for speculative and hedging purposes. | Traded on both derivatives and traditional financial markets, offering broader market access. |
|
Funding Rates |
Periodic payments between long and short positions to align futures price with the underlying asset. | No funding rates, prices are determined by market demand and supply. But it may involve rollover costs if the position is extended. |
|
Price Convergence |
May experience price divergence from the underlying asset due to funding rates. | Prices typically converge with the spot price as the expiration date approaches, reducing price discrepancies. |
|
Flexibility |
High flexibility for holding long-term positions. | Requires strategic decisions as the expiration date nears. |
|
Position Rolling |
No need for rolling positions; contracts can be held as long as desired. | Positions may need to be rolled over to a new contract upon expiration to maintain the same exposure. |
|
Leverage |
Offers high leverage, often up to 100x or more, depending on the platform. | Typically offers lower leverage compared to perpetual futures, often around 20x to 50x. |
|
Trading Focus |
Better suited for long-term trend following and scalping strategies. | Ideal for arbitrage, swing trading, and short-term strategies. |
7. Strategies for Perpetual Futures vs Quarterly Futures Traders
Choosing the right trading strategy can significantly impact your success when trading. The nature of perpetual futures vs quarterly futures contracts demands different approaches depending on the trader’s goals, risk tolerance, and market conditions.
7.1 Perpetual Futures Strategies
For perpetual futures, traders often focus on long-term trend following, given the ability to hold positions without worrying about expiration. This strategy works well in trending markets, where traders can ride the wave of price movements for extended periods.
Another popular strategy is scalping, where traders take advantage of small price fluctuations over a short time frame. However, the ongoing funding rates can eat into profits if not managed carefully, making risk management and frequent monitoring essential.
7.2 Quarterly Futures Strategies
Quarterly futures traders may prefer strategies that capitalize on the defined contract periods. For instance, arbitrage opportunities can arise as the contract approaches its expiry date, with traders exploiting the price convergence between the futures contract and the underlying asset.
Additionally, swing trading is a common strategy, where traders aim to profit from the price volatility within the quarter. Since there is no funding rate, traders can focus more on market analysis and timing without the added pressure of periodic payments.
Conclusion
In the debate of perpetual futures vs quarterly futures, the choice ultimately depends on the trader’s objectives and market outlook. Understanding the nuances between perpetual futures vs quarterly futures can help traders develop more effective strategies and make informed decisions, ultimately leading to better trading outcomes.
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